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Can a rise in income inequality improve welfare?


Truglia, Ricardo Nicolás Pérez (2007). Can a rise in income inequality improve welfare?. Master's thesis / Doctoral dissertation.


Since consumers are not thought to derive "intrinsic" utility from the consumption of status goods, the common vision among economists insists that relative concerns make everyone unhappy. Using a signaling-type model, I show that conspicuous consumption is a natural and efficient response of people to the absence of certain markets, especially if income is not interesting by itself. This implies that reducing inequality may be inefficient. Therefore I test this conjecture based on panel data for 10,000 respondents in Russia for 2000-2002, exploiting two identification strategies. The following results emerge: i. Regional expenditures inequality increases the marginal utility derived from consumption; ii. Aesthetic inequality distaste has been considerably underestimated by the literature; iii. The model is consistent with a utility function first concave and then convex; iv. The results remain unchanged after controlling for the income equivalence scale elasticity and a wide range of recent theories on Economics of Happiness.


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Truglia, Ricardo Nicolás Pérez